With the collaboration of Jaime Senior (Partner-Headrick Rizik Alvarez & Fernández)
1. What attributes does your country have that makes it a unique investment destination?
During the past 20 years, the Dominican Republic has emerged as a preferred destination for foreign investment in the Caribbean and Latin American regions. The cause of such overwhelming investor interest in the Dominican Republic relates to a number of advantages that the country offers and which provide a unique opportunity for investors of all industry sectors and from around the world.
First, the Dominican Republic boasts an enviable geographic location: it is truly the crossroads of the Americas, as it is located in the Caribbean Sea with easy and quick access to each of the North, South and Central American markets. This access may be capitalized on by investors by utilizing any one of the country's eight international airports and seven large ports, including the largest port in the Caribbean region.
Second, the country has opened itself up for foreign investment through the execution of the Dominican Republic-Central America Free Trade Agreement with the United States, a free trade agreement with the Central American region and the countries in the Caribbean basin, an Economic Association Agreement with the European Union, as well as at least eight bilateral investment treaties and a number of tax sparing and/or double-taxation treaties. The country is also a member of the World Trade Organization.
Third, the economy of the Dominican Republic is among the largest in Latin America, and has shown impressive resilience during the recent period of global economic uncertainty. With a gross domestic product of over US$100 billion and a yearly growth rate that has averaged 6% during the 1990's, 5% during the 2000's and approximately 4% during the past two years.
Fourth, the country counts on many different economic sectors for possible investment. The Dominican Republic is well known, throughout the world, for its stunning natural beauty, which has led to the growth of its tourism sector. However, the country also counts with large services and manufacturing sectors, as well as a growing investment mining operations. Thus, the investment opportunities in the Dominican Republic are not limited to one economic sector, but rather afford a gamut of industrial and service oriented prospects.
Lastly, the government of the Dominican Republic has been a stable and positive force in society for more than 20 years. Elections in the country are free, fair and open, and the Dominican Republic has an independent judiciary that has become increasingly sophisticated and speedy at resolving complex business disputes. Civil society groups, who both work with and at times act as a challenger to government policies, and a free press contribute to a vibrant and open society. The government has also committed, and is following through on such commitment, to markedly increase investment in education, which will lead to a more educated and productive workforce.
In effect, investing in the Dominican Republic presents a unique, compelling, proposition in the Western Hemisphere. As the central government and civil society groups continue working together to improve the social and economic infrastructure in the country, the investment value proposition will only improve.
2. What are the main drivers of investors moving to DR over the last year? / What have been the key growth sectors and market opportunities of the last twelve months?
The stable political and economic environment of the Dominican Republic has been one of the main drivers of investor interest during the past few years. As the global economy remains in a state of low to negative growth, the opportunity to invest in countries that show promise to provide solid investment returns has led to investors looking into making investments in the country. It is our expectation that as heavy infrastructure (both human capital and physical infrastructure) spending by the central government bears fruits, the country's economy will become even more attractive as a unique investment destination. Laws and regulations to incentivize foreign investments (as discussed in Questions 5 and 8, below), as well as free trade agreements and bilateral investment treaties have contributed to making the Dominican Republic an attractive investment destination and will likely continue to do so for the foreseeable future.
As it has been during the past few decades, the tourism industry remains a key growth sector in the country. In fact, as new highways and airports have been built during the past few years, new areas of the country have been opened up for investment (in particular in the tourism sector), and have led to new types of tourist initiatives (such as eco-tourism). Call centers have also been an area of important growth in the services sector, with several new entrants in this market sector during the past year. In the industrial sector, energy and mining have seen impressive amounts of new investment and interest, and both areas still remain as important growth areas and provide opportunities for long term investments. Finally, the market for financial services remains an attractive investment opportunity for many foreign investors, as the country offers an attractive return on equity proposition in this sector.
3. Can you identify the key economic risks that international investors have faced when Doing Business in DR in the last year?
The economy of the Dominican Republic remained stable and continued growing during the worst worldwide economic crisis in a century. However, as the central government has adopted measures suggested by the IMF to reduce the primary budget deficit, the country's economy has slowed. While the policy to bring down deficits – and indeed target a surplus – are positive economic developments in the medium- and long-term future of the country, in the short term the measures have led to a slowdown. As a general matter, foreign investors will also need to consider risks related to currency devaluation (i.e., foreign exchange risk) and the related issue of inflation in any long-term planning for investment in the country.
With respect to foreign investment, a recent example of governmental interference caused some concerns. Barrick Gold, a primarily Canadian mining company, acquired the rights to mine gold in the Pueblo Viejo mine in the Dominican Republic. Following a change of government last year, the new government alleged that the contract between the Dominican state and Barrick was deeply flawed and sought to renegotiate the contract with the mining company. Following several weeks of negotiations, an agreement in principle was reached between the Dominican state and Barrick. This renegotiation has led certain foreign investors to worry about the possibility that the Dominican government would seek to renegotiate the terms of, or even expropriate, investments. However, the government has repeatedly expressed its view that the aforementioned situation was an exceptional, one-off situation that it does not intend to become a repeated occurrence.
4. What are the main political risks (developments?) affecting inward investment that you have observed recently?
The political party that currently dominates politics in the country has been in power for 13 of the last 17 years, and currently controls both the Executive and Legislative branches of government. While the country's press and political freedoms have not been compromised, alternative political forces remain disorganized and do not currently present a coherent check on government power. The continued dominance of the country's political processes by this political party could pose a long-term risk for the country and for foreign investment. In fact, the central government has requested an increase in tax revenues, which was swiftly approved by the Congress, as the same party controls both the Senate and the Chamber of Representatives. This type of situation, where the central government believes that there is no effective check on its taxing power, could lead to an increase in taxes and duties.
5. What are the key regulations that govern in-bound FDI?
Beginning in the mid-1990's, the Dominican government has been very active and conscientious of the need to promote foreign investment. Law 16-95 on Foreign Investment eliminated many barriers to foreign investment and reoriented the government view on foreign investment towards a more welcoming, "open doors", policy. Additional laws are currently in force to facilitate investment, such as laws establishing industrial free zones, promoting development of tourism projects, creating the Center for Export and Investment of the Dominican Republic, as well as modern laws protecting intellectual property, regulating the debt and equity markets, the financial system, the telecommunications market and e-commerce.
6. Which Free Trade Agreements does your country currently enforce? Are there any prospective additions for the next 12 months?
The Dominican Republic has been very active in promoting and securing free trade and bilateral investment agreements. Currently in force are the following agreements: Dominican Republic-Central America Free Trade Agreement with the United States; a free trade agreement with the Central American region; free trade agreement with the countries in the Caribbean basin; an Economic Association Agreement with the European Union; bilateral investment treaties with Argentina, Chile, Cuba, Ecuador, Finland, France, Germany, Italy, Korea, Morocco, Netherlands, Panama, Spain, Switzerland and the United Kingdom; and a number of tax sharing and anti-double taxation treaties. Free trade agreements with Canada and the European Union have been the subject of government discussions and may be executed in the near future.
7. Are there any exchange controls that affect the flow of capital in your territory?
There are currently no controls or restrictions on repatriation of capital, dividends or other flows of capital. There is, however, a requirement that significant foreign exchange transactions be reported, for statistical purposes, to the Central Bank of the Dominican Republic. In addition, foreign exchange risk could be seen as affecting the flow of capital, and withholding rates on payments of interest and dividends should also be taken into account when a repatriation of capital is considered.
8. What incentives are in place to attract foreign investors?
As previously mentioned in Question 5, there are currently a number of laws and regulations in force that are specifically designed to incentivize foreign investment. For example, the industrial free zones laws permit manufacturers to establish plants in Dominican territory, where the raw materials for such manufacturing may be imported duty free to the country, and the finished product is also exported free of taxes and duties. The manufacturer's profits and machinery may also be repatriated and imported, respectively, on a tax and duty free basis. Similarly, incentives have been established for small business, for exports, for movie and TV production, for technology companies, for agricultural producers, among others.
The government has also created a "one stop shop" for regulatory approvals related to foreign investment at the Center for Export and Investment of the Dominican Republic, which facilitates obtaining the required approvals for investment in the country.
9. What pitfalls should international investors be conscious of?
When investing in industries where government is heavily involved in, or industries that have been recently de-regulated, it is important for foreign investors to understand and work within the framework of the government's role in such industries. For example, investors in the energy production industry should be aware and factor in the government's participation in the sector as the sole energy distributor, meaning that energy producer's primary (if not sole) client will be the government.
In addition, it is important to acknowledge the deficiencies and inefficiencies inherent in the enforcement of contracts on a local level. While arbitration, both local and international, is becoming increasingly used as a means for dispute resolution, care should be taken in negotiating and drafting agreements so as to structure protections for an investor. While this relates to acquisitions and other transactions, careful structuring is equally important to address matters related to labor law, compliance with regulatory requirements and unwritten rules related to the conduct of business in the country. With respect to this last point, the cultural factors and considerations of any investment (as discussed in Question 10, below), play an important role in making investments in the Dominican Republic.
10. What can investors expect when negotiating in DR?
The Dominican Republic has an extensive network of highly trained and experienced financial and legal professionals, many of which have received training and have worked abroad. However, cultural norms and unwritten rules are key parts of any negotiation and business discussion. For example, negotiations can take longer than they do in other parts of the world, as discussions can involve much posturing and getting to the "bottom line" is likely to take longer. As a negotiation strategy, it is not wise to begin from a middle ground, but rather to stake out a position that is favorable to the investor's position so that, after a number of meetings and discussions, a middle ground can be reached and both parties to the transaction can be satisfied with the outcome.
In addition, we would counsel investors not to rely on "handshake agreements" and other unwritten accords. While business discussions are generally conducted on friendly terms and once agreement is reached, the business is likely to be conducted on those grounds, it is essential to have a clearly documented agreement where the rights and responsibilities of each party are laid out. Even with such an agreement, disputes can arise, so it is important to be proactive in the monitoring of compliance with the terms of any agreement.
Finally, negotiations in the country are not limited to counterparties and business partners: it is essential to engage with the government and regulators. Unlike in some other countries, where interaction with regulators is likely to be highly structured and occurs during defined moments of the transaction, such discussions in the Dominican Republic are advisable throughout the course of negotiations and during the contract execution process. The regulators may be active participants in any important transaction, and it is advisable to engage them as such.
11. What is the main advice that you would give to a prospective investor interested in DR?
Understanding and working within the cultural and unwritten rules and norms of the country is a key consideration for any prospective investment in the Dominican Republic. Negotiations, legal structuring and drafting and even business terms are heavily influenced by such matters, and local legal, business and tax advisers can play key roles in identifying such pitfalls and providing advice and guidance to mitigate them.
12. Are there any restrictions, which govern the involvement of international counsel?
No. International legal counsel is frequently part of foreign investment transactions, and the Dominican legal market has become increasingly sophisticated and experienced in working on a cross-border basis. Note, however, that international counsel may not engage in the practice of local law.
13. Which areas of corporate law do you feel are currently the most under-developed?
While the country has a modern and sophisticated capital markets law (and regulations promulgated thereunder), other than the development of the local debt capital market, such laws remain underused and underdeveloped. In addition, bankruptcy laws are very antiquated (though several bills to reform the system have been discussed) and complex private equity structures, such as designing tax efficient debt-equity structures and funds with truly limited partners, are still a work in progress.
14. What trends have you observed in the role of laws governing contracts?
The country has been increasingly sensitive to internationalization trends, which have influenced its contract drafting techniques. The uses of foreign laws as applicable to the interpretation of contracts as well as the applicability of local or international arbitration are quite in vogue. The Dominican government is also open to the use of a foreign law to regulate a contract where it participates and even the Constitution now recognizes the possibility of using arbitration to solve disagreements for both private and public dealings. Dominican law has also experienced significant change, and particularly the laws affecting business have been subject to recent modifications that promote a more flexible and modern approach for nationals of other countries.
15. Are there any regional bodies or associations (legal, financial or political) active in this and neighbouring jurisdictions, which investors may encounter or should be aware of?
The Dominican Republic has a very active and open civil society. Among the most important associations in the country are: the American Chamber of Commerce (AMCHAM-DR), National Counsel on Private Business (CONEP), National Association of Young Businesspersons (ANJE), the chambers of commerce of several other nations (United Kingdom, Canada, France, Spain, Germany, among others), Dominican Exporter's Association (Adoexpo), as well as many industrial and industry-specific organizations. In our experience, participation in one or more of these associations by foreign investors is highly beneficial to such investors.
16. What are the key compliance issues that in-house counsel should be aware of when Doing Business in DR?
Adequate supervision of local personnel is essential to ensure that legal and regulatory risks for any foreign investor are mitigated. Clear policies and procedures regarding issues such as bribery, compliance with applicable laws and regulations, and taking steps to ensure that the workplace is safe are key considerations. In addition, we would recommend that investors take reasonable steps to monitor compliance by local counterparties (mostly suppliers, vendors and independent contractors) of the terms and conditions of contracts entered into with such counterparties.
17. How mature/ stable is the banking industry in DR?
The financial sector in the country is very mature and stable. The monetary and financial law is a modern instrument of regulation, and the regulators have proven to be both prudent and market-oriented. Foreign investment in the market is explicitly permitted by applicable law and encouraged by the government and regulators. The market is divided amongst established local players, foreign investors, and a large government bank. The country benefits from having multiple service banks, savings and loans associations, credit institutions and even microfinance lenders.
As an investment proposition, the return on equity in the Dominican banking sector is high, which has contributed to increased foreign investor interest in the market. In addition, the foreign exchange market in the Dominican Republic is deep and liquid (particularly in U.S. Dollars), and banks and savings and loan institutions are permitted to participate in that market and engage in foreign exchange operations and account opening.
The central government and regulators continue to seek to improve access to financial services by Dominicans of lower-income, and have taken steps to that effect. For example, recent regulations now permit banks and other financial intermediation entities to delegate certain functions to retailers and other agents that have direct access to consumers. This type of regulation shows the regulator's proactive approach as well as an emphasis on promoting greater access to financial services in the market.
18. Which key long term developments should investors be aware of in DR?
Due to all of the positive and unique aspects of investing in the Dominican Republic outlined in Question 1, the country is poised to benefit from such developments on a long term basis. In addition, an increasing investment in and focus on education means that the country will benefit from a more educated workforce in the coming decades, which can only lead to growth and development of the country's economy. Such economic growth will lead to a larger middle class and a more developed consumer society. In addition, increasing investments in infrastructure (such as airports and highways) are opening up new areas of the country for increased investments and growth of human capital. However, the country's leaders will need to be mindful of working to ensure that economic growth and opportunities do not lead to greater income inequality. Likewise, a lack of transparency in government accounts and the need to follow through with government policies and investments will also be key factors that could hamper the country's long-term investment potential.
19. How does the culture affect the way that business is conducted?
Please refer to Questions 9 and 10, above.
20. How is competition governed in this territory?
There are two laws in effect regarding competition: Law 1-02 on unfair competition and Law 42-08 on defense of competition. Competition law is generally focused on unfair trade practices, such as dumping, and cartel behavior, like price fixing. There is also a consumer defense agency in the country; this agency is likely to assert jurisdiction in matters related to competition as it affects consumers, whereas the two prior laws mentioned are geared towards disputes among business organizations or the government.